Author Topic: 2018 shareholders letter  (Read 11324 times)

Spekulatius

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Re: 2018 shareholders letter
« Reply #40 on: April 15, 2019, 03:49:33 PM »
It doesn't strike anyone as strange that the company states a 15% IRR goal (over and over, year after year) when it hasn't achieved that in the last 5, 10, 15, 20, or 25 year periods?

It's one thing to call it "aspirational" but one could interpret that as "deeply misleading".

This is a personal view, but the 15% is now being expressed as 95% CR and 7% return on investments. I see no issue in targeting those metrics over the long term. What they've achieved in the past doesn't have to be a guide to what they aspire to in the future, especially when they've sworn not to repeat the biggest mistake of all (the huge naked hedge).

That said, I couldn't care less that they target 15% and I find it surprising that people on here focus so hard on it. That's not a criticism, it's just that I have never had the sense that they manage towards the 15% goal in a bad way. Their mistakes are plenty, but they are so long term in approach that personally I don't think the mistakes stem from stretching to get to 15% - and that's the main negative of having a public goal. So I just ignore it, and focus on whether I think 95% and 7% are achievable (probably and probably not, respectively) and whether I'd be happy owning Fairfax at the current price if the ROE was say 10% over the long haul (yes with bells on).

I regard the 15% ROE as an aspirational goal at this point. What irks me more than FFH not even close to reaching this goal is the increasing share count (by 2.4M shares last year) that shalab pointed out. Itís even more irritating with all the talk about Singleton and quite frankly, it looks like he is talking one thing and doing just the opposite. Did someone ask a question regarding the share dilution and how it squares with the talk about buybacks? There might be a good explanation for this, but itís odd that itís not addressed in the annual report or in the shareholders meeting.
To be a realist, one has to believe in miracles.


Gregmal

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Re: 2018 shareholders letter
« Reply #41 on: April 15, 2019, 04:01:04 PM »
It doesn't strike anyone as strange that the company states a 15% IRR goal (over and over, year after year) when it hasn't achieved that in the last 5, 10, 15, 20, or 25 year periods?

It's one thing to call it "aspirational" but one could interpret that as "deeply misleading".

This is a personal view, but the 15% is now being expressed as 95% CR and 7% return on investments. I see no issue in targeting those metrics over the long term. What they've achieved in the past doesn't have to be a guide to what they aspire to in the future, especially when they've sworn not to repeat the biggest mistake of all (the huge naked hedge).

That said, I couldn't care less that they target 15% and I find it surprising that people on here focus so hard on it. That's not a criticism, it's just that I have never had the sense that they manage towards the 15% goal in a bad way. Their mistakes are plenty, but they are so long term in approach that personally I don't think the mistakes stem from stretching to get to 15% - and that's the main negative of having a public goal. So I just ignore it, and focus on whether I think 95% and 7% are achievable (probably and probably not, respectively) and whether I'd be happy owning Fairfax at the current price if the ROE was say 10% over the long haul (yes with bells on).

I regard the 15% ROE as an aspirational goal at this point. What irks me more than FFH not even close to reaching this goal is the increasing share count (by 2.4M shares last year) that shalab pointed out. Itís even more irritating with all the talk about Singleton and quite frankly, it looks like he is talking one thing and doing just the opposite. Did someone ask a question regarding the share dilution and how it squares with the talk about buybacks? There might be a good explanation for this, but itís odd that itís not addressed in the annual report or in the shareholders meeting.

There is a certain personality/salesmanship type that follows the below playbook;

Tout positive events
Spin mid spectrum events in your favor
Ignore bad events

There is an even more unique type that can take that last one and without guilt say it is actually something different and wholly positive.

There is no tolerance it seems, from many when a certain businessman, now politician does this sort of mind trickery, but it appears there is still tolerance for it on the investment front.

It is my belief that no profitable business trading below IV should ever be issuing shares. Period. Maybe, and only maybe in very minimal amounts, to certain key employees, but thats it. There is no excuse here.

petec

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Re: 2018 shareholders letter
« Reply #42 on: April 16, 2019, 12:47:44 AM »
@Spek my understanding is that the share issuances relate to the management restructuring - as you know there's been a huge shift in who manages what and in effect they wanted the new movers and shakers to have more equity. What annoys me is that they haven't given any detail around whether this might continue, whether there was a performance-based element, whether those employees have committed to buying shares in the market with salary, etc. Actually it doesn't just annoy me, it staggers me.

MarioP

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Re: 2018 shareholders letter
« Reply #43 on: April 16, 2019, 09:07:37 AM »
It doesn't strike anyone as strange that the company states a 15% IRR goal (over and over, year after year) when it hasn't achieved that in the last 5, 10, 15, 20, or 25 year periods?

It's one thing to call it "aspirational" but one could interpret that as "deeply misleading".
So I just ignore it, and focus on whether I think 95% and 7% are achievable (probably and probably not, respectively) and whether I'd be happy owning Fairfax at the current price if the ROE was say 10% over the long haul (yes with bells on).

Pete Iím really surprise that you  think FFH will probably not achieve 7% investment returns. Long term itís less than a S&P500 index. Iím more septic about 95% CR when the loss from catastrophes are include

petec

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Re: 2018 shareholders letter
« Reply #44 on: April 16, 2019, 09:19:30 AM »
It doesn't strike anyone as strange that the company states a 15% IRR goal (over and over, year after year) when it hasn't achieved that in the last 5, 10, 15, 20, or 25 year periods?

It's one thing to call it "aspirational" but one could interpret that as "deeply misleading".
So I just ignore it, and focus on whether I think 95% and 7% are achievable (probably and probably not, respectively) and whether I'd be happy owning Fairfax at the current price if the ROE was say 10% over the long haul (yes with bells on).

Pete Iím really surprise that you  think FFH will probably not achieve 7% investment returns. Long term itís less than a S&P500 index. Iím more septic about 95% CR when the loss from catastrophes are include

That's 7% across the whole portfolio, ~70% of which has to be invested in fixed income for regulatory reasons (quite rightly). 7% was very doable when treasuries yielded 5%. Much harder now - the extra work the equities have to do is far greater.

Parsad

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Re: 2018 shareholders letter
« Reply #45 on: April 16, 2019, 04:27:57 PM »
It doesn't strike anyone as strange that the company states a 15% IRR goal (over and over, year after year) when it hasn't achieved that in the last 5, 10, 15, 20, or 25 year periods?

It's one thing to call it "aspirational" but one could interpret that as "deeply misleading".
So I just ignore it, and focus on whether I think 95% and 7% are achievable (probably and probably not, respectively) and whether I'd be happy owning Fairfax at the current price if the ROE was say 10% over the long haul (yes with bells on).

Pete Iím really surprise that you  think FFH will probably not achieve 7% investment returns. Long term itís less than a S&P500 index. Iím more septic about 95% CR when the loss from catastrophes are include

That's 7% across the whole portfolio, ~70% of which has to be invested in fixed income for regulatory reasons (quite rightly). 7% was very doable when treasuries yielded 5%. Much harder now - the extra work the equities have to do is far greater.

As far as I know, they aren't required to have 70% in fixed income for regulatory reasons...where did you get that from? 

I think they could do 7% no problem long-term, as long as Brian Bradstreet is also there.  They will have to find someone as gifted as Brian to join Hamblin-Watsa.  I don't think they can rely on the young guys they have there already, because it's not something you just can learn...like picking equities, there is an art to fixed income as well. 

Brian is one of the best...Francis is damn good...but I don't know how much depth there is at Hamblin-Watsa on the fixed income side.  It's a project they need to work on over the next 2-3 years.  Find that guy!  Cheers!
No man is a failure who has friends!

petec

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Re: 2018 shareholders letter
« Reply #46 on: April 17, 2019, 01:04:16 AM »
It doesn't strike anyone as strange that the company states a 15% IRR goal (over and over, year after year) when it hasn't achieved that in the last 5, 10, 15, 20, or 25 year periods?

It's one thing to call it "aspirational" but one could interpret that as "deeply misleading".
So I just ignore it, and focus on whether I think 95% and 7% are achievable (probably and probably not, respectively) and whether I'd be happy owning Fairfax at the current price if the ROE was say 10% over the long haul (yes with bells on).

Pete Iím really surprise that you  think FFH will probably not achieve 7% investment returns. Long term itís less than a S&P500 index. Iím more septic about 95% CR when the loss from catastrophes are include

That's 7% across the whole portfolio, ~70% of which has to be invested in fixed income for regulatory reasons (quite rightly). 7% was very doable when treasuries yielded 5%. Much harder now - the extra work the equities have to do is far greater.

As far as I know, they aren't required to have 70% in fixed income for regulatory reasons...where did you get that from? 

I think they could do 7% no problem long-term, as long as Brian Bradstreet is also there.  They will have to find someone as gifted as Brian to join Hamblin-Watsa.  I don't think they can rely on the young guys they have there already, because it's not something you just can learn...like picking equities, there is an art to fixed income as well. 

Brian is one of the best...Francis is damn good...but I don't know how much depth there is at Hamblin-Watsa on the fixed income side.  It's a project they need to work on over the next 2-3 years.  Find that guy!  Cheers!

I phrased that badly. What I meant was: they have to have a lot in fixed income for regulatory reasons and generally the weighting has been around 70%. In fact I think it's probably more like 75% on average - off the top of my head I can't recall a time when they had >30% in equities although I may be wrong. I don't ever expect them to have much more than their own book value invested in equities and I don't get the impression they feel they can add much equity exposure from today's starting point. I draw that assumption from various sources.

Anyway the core point is that the S&P is not a fair benchmark for the entire portfolio, as was implied by the post I was replying to. I think they might do 7%, but with fixed income priced where it is I'm happier with an assumption of 5% or 6%. However the float leverage means that even with the portfolio performing below the S&P, BV growth could beat it. And I think the debt+warrant deals are a very smart way to juice returns in a low rates environment - I hope to see more of them.

Totally agree that the fixed income bench is opaque and replacing Bradstreet is a huge project. Frankly it worries me if you don't know who's behind him in the queue - I thought you knew everything ;)

Cigarbutt

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Re: 2018 shareholders letter
« Reply #47 on: April 17, 2019, 07:10:31 AM »
The historical return on bonds has been exceptional, explains a lot of the "excess" return earned over the years and, looking at a table that has been included up to the 2017 annual report and at other disclosures, FFH bond returns over 10 to 15 yr periods have mostly beat the return on the S&P, by a wide margin in some periods. This will be very hard to repeat.

From a long-term perspective, in the last 10 years, bond exposure has been 2-3x common stock exposure. The proportional exposure was 4-5x in the 2003-7 period and about 10x in the 1999-2001 period. So the times, they are changin'.

Whatever regulatory or risk management reasons and similar to Berkshire Hathaway, the cash and fixed income portion of the portfolio has remained quite constant in comparison to liability reserves. Using: (cash + cash equivalents + bonds + preferred) / (Insurance contract liabilities minus recoverable from reinsurers) as a relatively crude but quite accurate measure, the ratio has been 1.06 +/- 0.06 over the last 10 years and 1.03 +/- 0.03 over the last 8 years.

At this point, for better or for worse, the 7% pre-tax expected return on the 1425.97 USD investments per share has a lot to do with the net exposure to equity investments in the portfolio.

coc

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Re: 2018 shareholders letter
« Reply #48 on: April 17, 2019, 09:33:09 AM »
There is no specific regulatory requirement, but Fairfax could never put so much in equities that a major drop (of 50% type magnitude or more) would impair their claims-paying ability or their solvency as an insurer. Rather than look at it as ďdoes fixed income cover claims?Ē, you might want to see it in reverse ďdoes my capital cover my equity portfolio?Ē

At the end of the day, the claims are a revolving door. In any one period, Fairfax does not need access to most of its investments. But it does need to be (comfortably) solvent at all times.

Even Berkshire, with all of its earnings sources, has rarely had its equity portfolio greater than its actual shareholdersí equity (in other words, a leveraged equity portfolio).

Imagine for a second that Fairfax put 150% of its capital in equities ó so call it $16 billion ó which then fell 50% in a market rout. With $3 billion of capital left, they would be in very, very dire straits as an insurance company - the regulators could force them to raise capital, stop underwriting, dilute, etc.

So there are limits - but not hard limits. This is my understanding.
« Last Edit: April 17, 2019, 09:37:08 AM by coc »

TwoCitiesCapital

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Re: 2018 shareholders letter
« Reply #49 on: April 17, 2019, 09:50:57 AM »
It doesn't strike anyone as strange that the company states a 15% IRR goal (over and over, year after year) when it hasn't achieved that in the last 5, 10, 15, 20, or 25 year periods?

It's one thing to call it "aspirational" but one could interpret that as "deeply misleading".
So I just ignore it, and focus on whether I think 95% and 7% are achievable (probably and probably not, respectively) and whether I'd be happy owning Fairfax at the current price if the ROE was say 10% over the long haul (yes with bells on).

Pete Iím really surprise that you  think FFH will probably not achieve 7% investment returns. Long term itís less than a S&P500 index. Iím more septic about 95% CR when the loss from catastrophes are include

That's 7% across the whole portfolio, ~70% of which has to be invested in fixed income for regulatory reasons (quite rightly). 7% was very doable when treasuries yielded 5%. Much harder now - the extra work the equities have to do is far greater.

Agreed here. 7% is going to be very difficult in an environment where 10-year Treasuries yield 2.5%.

Bradstreet has been amazing in bonds, and the return has been exceptional - but that all occurred primarily in an environment where yields were falling (i.e. bonds purchased gaining value).

Starting from yields of 2.5% with the bulk of the portfolio in short-term debt, we don't have that tailwind. Brian may make some very prescient moves (a la selling portfolio following Trump's election), but that primarily results in losses avoided - not gains to the bottom line that count towards that 7%. That will generally be the case if we're in an extended period of rising rates like Prem believes.

Until interest rates are significantly higher, and the portfolio deployed into longer-term debt collecting the higher rates, a consistent 7% hurdle/average is going to be very difficult on the investment side.